FROM IDEA TO LAUNCH - Legal considerations for Crypto and FinTech startups in Switzerland

Switzerland is one of the world’s most attractive locations for crypto and FinTech startups and companies. Clear regulatory frameworks, an innovation-friendly environment and the Crypto Valley make it particularly appealing to founders.

At the same time, the regulation on crypto and FinTech business models can be very complex. Even minor differences in a business model may determine whether a project can be implemented without authorisation or requires authorisation from the Swiss Financial Market Supervisory Authority (FINMA).

Choices made at the outset may determine a project’s subsequent success or expose it to significant regulatory risks. Founders typically ask questions such as:

• Do I need FINMA authorisation at all, is affiliation with a self-regulatory organisation (SRO) sufficient or is the business model not regulated?
• How is my token classified—as a utility token, payment token, asset token or a hybrid token?
• Do I accept client funds or offer a wallet?
• How must my white paper be structured from a legal perspective?
• Which legal form should I choose for my company?
• Which agreements do I need before going live?
• How should the company be financed, and is it intended to raise external capital — through a token sale or a traditional equity financing round?
• Do data protection and AML obligations apply?
• Should the source code be released as open-source software?
• How do I find a bank to open a corporate account?

The following provides a brief overview of eight topics that should be reviewed from a legal perspective before a crypto project is launched.

1. The business model determines the regulatory framework

What matters is not the name of your company or token, but the services actually offered and the underlying business model. Even minor differences in a business model may result in different financial market laws applying.

For example, if the business model includes the custody of payment tokens, the following laws may apply:

In non-custodial models, where the provider never has access to the private keys or control over the crypto-assets, no financial market regulation may apply—depending on the specific design.

2. Not all tokens are the same (token qualification)

A token’s legal classification affects numerous regulatory issues. A careful analysis during the concept phase prevents the business model from having to be adjusted later. In Switzerland, the following token categories are distinguished:

• Payment tokens: Primarily intended to be used as a means of payment (e.g. BTC or stablecoins). 
• Potential regulation: AML and banking regulation.
• Utility tokens: Provide access to a digital application or service on the blockchain. This category includes, in particular, tokens required for the operation and security of blockchains (incl. governance). 
• Potential regulation: Generally unregulated (sanctions law may need to be considered, e.g. in an ICO).
• Asset tokens: Represent assets, equity or claims and are generally treated like traditional financial instruments. In terms of its economic function, the token is therefore comparable to a share, bond or derivative. 
• Potential regulation: Financial market laws (FinSA, FinIA, etc.).

3. Raising capital through traditional financing rounds and/or token sales (ICOs, Token Launch, SAFTs)

The development and implementation of a blockchain or FinTech project tend to be capital-intensive, particularly during the initial phase. If the required capital is to be raised through a traditional financing round, the founders should consider at an early stage what type of investors they wish to attract. In particular, they must decide whether to bring on board strategic investors — such as venture capital firms or business angels — or primarily seek purely financial investors. It should also be borne in mind that preparing a startup for a financing round (“investor readiness”) may require considerable time and resources.

Alternatively, capital may be raised through a token sale. One potential advantage is that investors generally do not acquire equity in the company. In the case of a token sale, too, the applicable regulatory framework is determined not by the token’s description but by its legal classification. Depending on the token’s specific features, anti-money laundering obligations or prospectus requirements under financial market law may apply. In particular, the following points should be reviewed before the launch:

• Legal classification of the token
• KYC and AML processes (payment tokens)
• Prospectus requirements under the FinSA (asset tokens)
• Contractual documentation (e.g. SAFT, Token Purchase Agreement or Token Sale Terms)

4. Open Source or Proprietary Code?

Founders should decide at an early stage whether the source code of a blockchain application should be released as open-source software, made available for inspection only or kept confidential. Particularly in the case of Layer 1 infrastructure projects, it was common practice for many years to make the source code for blockchains publicly available (e.g. on GitHub). This reflects the underlying concept of decentralized networks, which are not intended to be controlled by a single central entity. However, with the increasing development of commercial business models on existing blockchains, this approach has partially changed. Today, source code is not always published in full, or its use is restricted by specific licensing models.

Moreover, the disclosure of source code does not necessarily mean that it may be freely used, modified or commercially exploited. The relevant factor is the license under which the code is released. The choice of licensing model may determine, in particular, whether third parties are permitted to modify, further develop or distribute the code, or use it for their own commercial products.

Whether and to what extent the source code should be disclosed must therefore be assessed on a case-by-case basis, taking into account the specific business model, the intended degree of decentralization and the desired level of control over the technology. Intellectual property protection, commercial exploitation and the involvement of external developers should also be considered.

5. The operational implementation of AML requirements is often underestimated

Many business models involving payment tokens are subject to the AML-regulation. The greatest challenge often lies not in the statutory requirements themselves, but in their operational implementation.

A functioning onboarding process, risk-based KYC procedures, internal directives and an appropriate compliance structure should therefore be established before going live.

6. Choosing the corporate structure

A crypto foundation, an operating corporation or perhaps an association under Swiss law?

The choice of an appropriate corporate structure affects not only regulatory matters, but also subsequent financing rounds, corporate governance and employee participation plans.

While the company limited by shares (Aktiengesellschaft; AG) has become the established choice for many crypto and FinTech companies, foundations or associations may also be appropriate in certain circumstances for Layer 1 projects or DAO structures. The appropriate structure, however, always depends on the specific business model.

7. Bank account

Opening a bank account should be planned well in advance. Banks regularly require extensive information about the business model and the tokens in use. Particularly for DeFi business models, lengthy onboarding processes should be expected.

Many founders underestimate the time required to open a bank account.

8. Access to the EU market

Swiss startups and companies may also be able to target the European market. Anyone wishing to sell tokens to investors in the EU should assess at an early stage which requirements under the Markets in Crypto-Assets Regulation (MiCA) must be observed for a token launch in the EU.

Questions concerning the white paper, marketing rules or the requirements for a public offering of tokens may arise at an early stage of the project.

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By its nature, this article can provide only an initial overview of the regulatory landscape in Switzerland. Depending on the business model, further regulatory considerations may be relevant. An early legal analysis provides planning certainty and prevents costly adjustments at a later stage of the project.

Zürcher Rechtsanwälte AG supports crypto and FinTech startups and companies from the initial regulatory analysis and structuring of the business model through to implementation and successful market entry. Drawing on our many years of experience in Swiss financial market law and crypto regulation, we assist startups and established companies alike with regulatory matters and innovative blockchain projects.